A creditor is an individual or institution that provides a loan to a borrower. The borrower is expected to repay the money with interest, according to the terms of the loan agreement. If the borrower doesn’t pay back the loan on time, the creditor may take legal action against him or her.
In most cases, a creditor is a financial institution however it could be any person who is owed money. A creditor provides many different types of services to debtors, such as mortgages, personal loans, and credit cards.
A creditor has the right to demand repayment of a loan. If payment is not made, the creditor may seek legal remedies, such as filing a lawsuit against the debtor, garnishing wages or seizing property. Creditors may also assess penalties for late payments. Knowledge about creditors and debtors is important in accounting for instance while writing a trial balance. See more.
Some common types of creditors include:
- Real creditors: They’re financial institutions who, if you fall behind in your payments, can take legal action to collect what is owed to them.
- Personal creditors are friends or family members to whom you owe money.
- Secured creditors: Lenders who hold a mortgage or lien on your home are called secured creditors because lenders have a legal claim to your home.
- Unsecured creditors: this is similar to a secured creditor however, there is no collateral. Examples include credit card company
Accounts or individuals that supply goods or services to a business in credit or where payment is not due yet, and they expect to be paid in the future are called sundry creditors. Visit here for more information.
How do creditors earn money?
There are three ways that creditors make money.
- One is by charging interest on the credit they extend. Credit card companies make most of their profit in this way. These companies often borrow money at a low-interest rate (or no interest at all) and then lend it out at a higher rate. For example, banks often borrow money through deposits at a Federal Reserve Bank or another bank and then lend that money to borrowers who pay higher interest rates for loans
- The second way is by charging fees, like late payment fees, which may be applied if payment is received later than the agreed-upon due date.
- The third way is through the creditor’s risk exposure when extending credit to an approved borrower. If you cannot repay your debt, the creditor may pursue a legal claim in court or hire a debt collection agency to collect the money. Because of the terms, which are usually included in the contract, creditors can get a car back, take a portion of a person’s wages if they default on their debt, and try to have a court order enforced against an individual who doesn’t pay.
There is another way creditors make money that is by charging fees for making loans. Additional way creditors can make money is by taking advantage of fluctuating prices: they can buy an asset from someone in the future at a low price, hold it until its price rises, and then sell it back to the person in the future for more than they paid for it